CEO overconfidence effects on mergers and acquisitions

摘要

The purpose of the study is to extend further from the result studying overconfidence effects of CEOs on single deal of Malmendier and Tate (2008)'s article to study overconfidence effects of CEOs on multiple mergers and acquisitions. Based on the psychological and financial theories, the likelihood of overconfident CEOs acquiring a company is the net effect of two manifestations of overconfidence. The first manifestation is called miscalibration in psychology. Under this manifestation, overconfident CEOs overestimate the benefits and underestimate the costs of the merger. Thus, it increases the odds of overconfident CEOs undertaking the acquiring project. On the other hand, the second manifestation is called ''better-than-average'' effect. Under this manifestation, overconfident CEOs will curb investment to avoid external finance if the firms do not have sufficient internal fund. The reason for this biased decision is because overconfident CEOs believe that their firms are undervalued by the market. They want to avoid external finance so that the mispricing gap does not become greater. The net effect of the two manifestations of overconfidence on the probability of overconfident CEOs pursuing multiple mergers and acquisitions (M&A) is debatable. Malmendier and Tate (2008) empirically prove that overconfident CEOs are more likely to purchase another firm than non-overconfident colleagues in single deal. Moreover, the announcement effect of single deal by overconfident CEOs is significantly more negative than their rational counterparts' results. The sample used in the study consists of 622 mergers of 306 firms occurred in the US during 2006-2013. The data is retrieved from SDC Platinum, Center for Research in Security Prices (CRSP) and Compustat. I find no evidence about the acquisitiveness and the worse performance of overconfident CEOs compared to others in multiple M&As. My findings suggest that overconfident CEOs are equally acquisitive as non-overconfident CEOs in multiple deals. Their multiple M&A deals receive similar announcement returns to others' during the normal economic cycle. One interesting observation is that during the financial crisis overconfident CEOs are more acquisitive in multiple acquisitions than rational CEOs. Although the majority of overconfident CEO's mergers are diversifying, they still receive significantly positive abnormal returns as opposed to the non-overconfident counterparts'. The reason for the interesting findings can be either investor sentiment or the external support of a strong and independent board as well as CEO's personal trading experience.